Copper Seen Rising 17% on Biggest Mine Shortages Since 2004

Copper’s worst start in a decade may extend into this quarter as stockpiles expand, Chinese imports plunge and Japan reels from its nuclear disaster, before rebounding to a record when shortages take hold.

The metal may drop as low as $8,500 a metric ton, or 10 percent from $9,440 at 11:15 a.m. in London, before rebounding to $11,000 by Dec. 31, 17 percent more than now, according to the median estimates in a Bloomberg survey of 24 analysts and traders. The shortages will be the biggest since 2004, when prices jumped 37 percent, the survey showed.

Stockpiles tracked by the Shanghai Futures Exchange rose 85 percent since the end of September, deterring imports. Analysts expect a drop in purchases by Japan after the earthquake and tsunami on March 11 closed factories and caused the worst nuclear accident in a quarter century. That trend should reverse because the country, the fourth-biggest copper user, will need to rebuild, draining inventories as growth in mine output slows.

“We see renewed strength in the second half and you’ve got to be bullish copper for the next few years,” said Christin Tuxen, the analyst at Danske Bank A/S in Copenhagen ranked by Bloomberg as the most accurate industrial-metal forecaster over two years. “The global recovery is becoming more broad-based and you’re not going to see any new mines coming on stream for at least this year.”

Prices fell 1.8 percent in the first quarter, the worst for the period since 2001, and futures traded on the London Metal Exchange anticipate little change through the end of the year, with the December contract at $9,376. Inventories monitored by exchanges in London, New York and Shanghai climbed 19 percent to about 677,700 tons this year, close to the highest since June.

Dollar Index

While commodities beat stocks, bonds and the dollar in the first quarter, copper and zinc were among the worst performers in the Standard & Poor’s GSCI Index of 24 raw materials. Sugar, wheat and cocoa were also among the losers. Cotton, gasoline and crude led the gains.

The S&P GSCI index rose 15 percent in the first quarter, compared with a 4.3 percent advance in the MSCI World Index of equities. Treasuries lost 0.1 percent, a Bank of America Merrill Lynch index shows.

Hedge funds cut their net-long positions, or bets on higher prices, by 35 percent to 25,574 contracts since the end of 2010, according to data from the U.S. Commodity Futures Trading Commission. Their position jumped 33 percent in the week ended March 29.

Lunar New Year

China, which uses 39 percent of global copper, imported 158,185 tons of refined metal in February, the least since November 2008, customs data show. Demand may have dropped because of the weeklong Lunar New Year holiday. Investors have become concerned that growth is slowing after the central bank boosted interest rates three times and raised banks’ reserve requirements six times since mid-October to cool inflation.

China, the second-largest economy, will expand 9.5 percent this year, from 10.3 percent in 2010, still more than five times the pace of the euro region, according to the median estimates in Bloomberg surveys of as many as 19 economists.

“Seasonally speaking, April is a strong month for copper demand,” said Leon Westgate, an analyst at Standard Bank Plc in London. “If April fails to live up to its reputation as a strong month in terms of demand, then the metal’s immediate outlook is looking rather bleak.”

Copper also fell as protests across northern Africa and the Middle East boosted crude prices to their highest in more than two years. A $50-a-barrel gain in oil to a record would cut copper demand by about 640,000 tons this year, Deutsche Bank AG said in a report March 30.

Goldman Sachs

The events in Japan and the Middle East mean that metals prices may stall in the next several months before rebounding, a team of analysts led by London-based Jeffrey Currie at Goldman Sachs Group Inc. said in a report March 29. They expect copper to be at $8,800 in 6 months before rallying to $11,000 in 12 months and advise buying the LME’s December copper contract.

At the same time, the world economy is still expanding. Gross domestic product growth will accelerate to 4.4 percent in the third quarter and 4.5 percent in the following three months, compared with 3.8 percent this quarter, Barclays Capital estimates.

The U.S. economy is “getting better month by month,” Warren Buffett told reporters in Bangalore on March 22, signaling that the 25 percent jump in oil prices in the past year won’t be enough to halt the recovery.

Purchasing Managers

Business activity expanded in March at almost the fastest pace in two decades, a report from a Chicago purchasing managers group showed March 31. Consumer confidence rose for the first time in five weeks, the Bloomberg Consumer Comfort Index showed the same day. The economy will expand 3.1 percent this year, compared with 2.9 percent last year, according to the median of 68 economists’ estimates compiled by Bloomberg.

Producers say they aren’t supplying enough to meet global demand. More than 500 delegates from the mining industry meet today for the three-day World Copper Conference in Santiago, the capital of the world’s biggest copper producing nation.

“There are still reasons to be bullish on copper into next year,” said David Wilson, an analyst at Societe Generale SA in London and last year’s most-accurate copper forecaster tracked by Bloomberg. “The market is still going to be tight.”

Freeport-McMoRan Copper & Gold Inc., the largest publicly traded copper producer, said in January that it would produce less metal than forecast this year. The Phoenix-based company is mining layers of ore with less metal content at its Grasberg mine in Indonesia, which it says has the biggest recoverable copper reserves in the world.

U.S. Homes

Supply will fall 400,000 tons short of demand, enough to build 2 million U.S. homes, according to the Bloomberg survey.

BHP Billiton Ltd., the largest mining company, said in January that output from the Escondida mine in Chile, the world’s biggest, would drop by as much as 10 percent in the year ending in June because of lower ore grades. Codelco, based in Santiago and the largest copper producer, said on March 25 that supply from its mines fell for the fifth time in six years.

London-based Anglo American Plc and Kazakhmys Plc reported lower output this year. Tom Albanese, chief executive officer of Rio Tinto Group, the second-largest mining company, told investors in a conference call in February that the industry has “struggled” to maintain supply because of declining ore grades, delays to mine expansions and disruption from strikes.

Ore grades averaged 0.76 percent copper content in 2009, compared with 0.9 percent in 2002, according to CRU, a London- based research company. That means one ton of rock contains 7.6 kilograms (16.8 pounds) of metal.

Statistics Institute

Chile mined 6.6 percent less of the metal in February than a year earlier, the fifth decline in the last six months, the National Statistics Institute in Santiago said March 30.

For mining companies’ revenue, the drop in production will be more than offset by higher prices. Copper averaged $9,621 since Jan. 1, more than any year on record.

Producers are competing to secure assets after a dearth of new projects. Minmetals Resources Ltd., the Hong Kong unit of China’s biggest metals trader, made an unsolicited offer of about C$6.3 billion ($6.5 billion) in cash for Equinox Minerals Ltd., it said today, a move that would give it control of Africa’s largest copper mine.

A measure of combined earnings per share across the 126- member Bloomberg World Mining Index is forecast to rise 42 percent this year, compared with anticipated growth of 14 percent across the Standard & Poor’s 500 Index, according to data compiled by Bloomberg using analysts’ forecasts.

The mining gauge, led by London-based Rio and Melbourne- based BHP, climbed 0.4 percent this year.

While copper demand growth will slow to 4.1 percent this year, from 9.6 percent in 2010, that will be to a record and still more than twice the anticipated 1.7 percent expansion in supply, Barclays Capital estimates. The bank forecasts an 889,000-ton shortfall.

“We’re still seeing an incredibly tight market,” said Kevin Norrish, a managing director at Barclays in London. “China has to buy copper. They can’t find substitutes.”

Copper s worst start in a decade may extend into this quarter as stockpiles expand, Chinese imports plunge and Japan reels from its nuclear disaster, before rebounding to a record when shortages take hold.
The metal may drop as low as $8,500 a metric ton, or 10 percent...